An annuity can turn some or all of your pension savings into a guaranteed income, either for a fixed period or for the rest of your life.
For many people, that certainty can be reassuring. Knowing how much income will arrive and when can make budgeting easier and reduce concerns about market performance.
However, buying an annuity is an important financial decision. Once a lifetime annuity has been arranged and the cooling-off period has ended, it usually cannot be changed or cancelled.
Before committing your pension savings, speaking to a pension expert could help you understand whether an annuity suits your retirement plans and, if it does, which type may be appropriate.
1. You Can Compare More Than One Provider
When approaching retirement, your existing pension provider may offer you an annuity. However, you are not normally required to accept this offer.
Different providers can offer different levels of income for the same pension value. The rate available may depend on factors including your age, health, where you live, the size of your pension and the features you select.
Comparing providers is therefore an important part of the decision.
It is also worth checking whether your existing pension includes a guaranteed annuity rate. These guarantees may offer more income than rates available elsewhere, although conditions can apply.
A pension expert can review your existing plan, identify any valuable guarantees and compare the wider annuity market on your behalf. Even a relatively small difference in annual income could become significant when received over many years.
2. Your Health Could Affect the Income Offered
Your medical history and lifestyle can influence the annuity rate available to you.
Some people may qualify for an enhanced annuity, which provides a higher income based on health or lifestyle factors that could affect life expectancy. These may include:
- Certain medical conditions
- A history of serious illness
- Smoking
- High blood pressure
- Being overweight
- Previous manual occupations
It is important to answer health and lifestyle questions fully and accurately. Leaving out information could mean missing the opportunity to receive a higher retirement income.
Some people may feel uncomfortable discussing their health or may assume that a manageable condition is not relevant. A regulated financial adviser can explain what information providers require and help ensure the application reflects your circumstances accurately.
3. Product Features Can Change the Outcome
Choosing an annuity involves more than just accepting a rate.
You may need to decide whether your income should remain level or increase over time. A level annuity will usually offer a higher starting income, but its spending power may reduce as prices rise. An escalating or inflation-linked annuity may start lower but increase during retirement.
You may also want to consider what happens after your death.
A single-life annuity will normally stop paying when you die. A joint-life annuity can continue paying an income to a spouse, civil partner or another nominated dependant, although including this protection will usually reduce the initial income.
Other options may include:
- A guaranteed payment period
- Value protection for beneficiaries
- Monthly, quarterly or annual payments
- Payments made in advance or arrears
Each additional feature can affect the income offered. Advice can help you consider which protections are genuinely important to you and where the trade-offs may be worthwhile.
4. Tax Can Affect How Much Income You Receive
Annuity income is normally taxable and will count towards your overall income for the year.
The amount of tax you pay will depend on your individual circumstances and any other income you receive, which could include the State Pension, earnings, rental income or payments from other pensions.
Before purchasing an annuity, you may also be able to take part of your pension as tax-free cash, subject to the relevant allowances. However, taking a larger lump sum leaves less money available to purchase the annuity and may reduce the income it provides.
The timing of the purchase can also matter, particularly if you are still working or expect your income to change when you retire.
A pension adviser can help you understand how an annuity may fit alongside your other income and what the tax position could mean for the amount you actually receive.
5. An Annuity Is Not Your Only Option
Guaranteed income can be valuable, but it is not the only way to use a defined contribution pension.
Depending on your circumstances, you may also be able to:
- Leave your pension invested
- Use flexible-access drawdown
- Take one or more lump sums
- Combine different retirement-income options
- Delay accessing some or all of your pension
For example, some people may use part of their pension to purchase an annuity that covers essential spending while leaving the remainder invested for greater flexibility. Others may prefer an annuity later in retirement rather than immediately.
Each option comes with different benefits, risks and tax considerations. Keeping money invested may offer growth potential and flexibility, but its value can fall as well as rise. Taking large withdrawals could also increase the risk of paying more tax or exhausting pension savings too quickly.
The right approach will depend on the income you need, the level of certainty you value and how much flexibility you want to retain.
Make the Decision With Greater Confidence
An annuity may provide valuable certainty and reassurance throughout retirement. However, the provider, rate and product features you choose can influence your income for many years.
Speaking to a regulated financial adviser before buying can help you compare the market, disclose relevant health information, understand the tax implications and consider whether another retirement-income option may suit you better.
Most importantly, advice can help ensure the decision reflects your circumstances rather than simply accepting the first option offered.
Considering an annuity? Speak to My Pension Expert to compare your options and make an informed decision about your retirement income.
Pension advice is tailored to your individual circumstances and can help you understand the options available before making decisions about your retirement income.
This is for general information and does not constitute personal financial advice. Annuity rates can change, and the income available will depend on your circumstances and the options selected. Tax treatment depends on individual circumstances and may change in the future.
